When it comes to buying cars and trucks, I find the cost of new vehicles to be prohibitively high. The cost of an average new vehicle is around $38,000, and will reach $40,000 in just a few years. I love a new car, but have turned my focus to used cars in the past few years.
For a guy who spent 32 years at a car company, you may find it odd that I prefer a used vehicle. You are going to learn that I am a frugal guy, however, you can get so much more enjoyment from buying a used vehicle knowing that you did not overspend AND you can make it your own through customization. The path you take will depend on your personal needs and wants–car buying can be an emotional experience, so be conscious of your surroundings!
I’ll talk about used cars another time. For now, I want to spend some time talking about your options when seeking a new vehicle.
You notice I did not say new vehicle purchasing. That is because there are a number of ways to buy or finance your car. I will discuss each, briefly, below:
As the term suggests, one way to buy a car is by financing the purchase through a loan. It is a good option if you drive a lot of miles each year, want the protection of the new vehicle warranty, and/or just gotta have the newest car in the market. You can do this through your bank, credit union or through the dealer.
Shop around for the best rate–new car dealers can offer the convenience of several sources (including the manufacturer of the car you are buying) or local banks that they have a relationship with. Just understand that the dealer is going to make some money off any loan they provide you. They do this by marking up the rate of the loan by a certain percentage. In many cases, this is the only way a dealer makes money on the car they sell you. It is not a bad thing, as long as you are comfortable with the rate and monthly payment.
Check with your bank or credit union for their rates before signing that loan with the dealer. A good source for rate information can also be found on Bankrate.com.
There will be times when the manufacturer (OEM) of the brand you are buying will pay to lower the interest rate in order to sell a certain model. They may also include a rebate to go with that financing. A good dealer will do a great job explaining your options. Be sure to demand this explanation.
This is a good option if you like to acquire a new vehicle every 2-3 years and do not drive a lot of miles. You are essentially renting a vehicle for a monthly amount based on the following factors:
- Residual Value of the Vehicle, or the projected resale value of the vehicle after the term of the lease. This is typically represented as a percentage of the Manufacturer’s Suggested Retail price (aka the window sticker amount). This will vary greatly by the model you are shopping. In general, the more popular the vehicle, the higher the residual value.
- Residual values can also be supported by the manufacturer as a way to boost sales of certain vehicles. Essentially, they are paying down the interest rate and/or propping up the residual value. This is not cheap for a manufacturer to do, and is why you won’t likely see smaller companies like Tesla offering low lease deals.
- Rate or Money Factor is the interest you will pay as part of your monthly payment
- Annual Miles are factored into any lease. The average is typically 15,000 per year, but if you can commit to driving less you can see a lower payment. Before agreeing to that ultra low mileage 10,000 mile lease, be sure that is realistic for you. Otherwise, you will pay a penalty for every mile you put on your vehicle beyond the agreed amount.
As I said, leasing is essentially a long term rental. You will be financing the difference between the Manufacturer’s Suggested Retail Price and the Residual Value. The higher the residual value, the less you are financing. Many times you will be able to lease a full size pickup (Chevrolet Silverado, Ford F150 or Dodge Ram) for less than mid size car because of the OEM’s financial support of the residual value and/or lease rate.
If you have the means and want to own a vehicle vs. lease, buying without financing is an efficient way to go. You do not end up paying interest on a car loan and you have a new car free and clear of any lending institutions. If your investments are returning a rate greater than the loan rate, you may may to look at the cost of tying up your money in a depreciating asset. When in doubt, check with your financial expert for advice!
Now there’s a third alternative to buying vs. leasing: car subscription services. They’re operating in a number of places in the U.S., with one nationally available service so far. Edmunds.com provided an overview back in January 2019, with this summary below. I am going to explore this topic in a separate blog some time in early 2020 (click HERE if you want to learn a little more before then):
PROs of a Car Subscription Service
- Convenience. Most let you set up the subscription online and manage it via a smartphone app. The company usually delivers the car to you.
- Flexibility. You can change cars more frequently than with leasing or buying.
- Potential cost savings. There are no down payments or financing charges.
- No negotiating. The fees are set.
- Less commitment. Some subscription services can be for as short as a month.
- Some shoppers with damaged or light credit may find it easier to be accepted into a subscription service than getting approved for a traditional finance contract or lease program.
CONs of a Car Subscription Service
- Ownership is important to you. You want to buy a car, pay it off, and be free of a monthly payment for a few years.
- Restrictions on car use. Most car subscription programs impose rules on drivers, and a number use vehicle tracking. More about that later.
- Switching cars holds no appeal.
- Again, no negotiating. If you’re someone who waits for car sales or you’re good at driving a hard bargain when leasing or buying, your skills will go unused with subscription plans.
I have used everything except a subscription service in my new vehicle acquisitions over the years. For me, the method used was determined by my needs at the time. I think you will find the same true for you. Hopefully this information will help you make a better informed decision.
Please reach out to me if you have any questions about your upcoming acquisition.